DO YOU KNOW YOUR DEMONS?
Every company owes a disproportionate share of sales to good customers who buy a lot of merchandise or services. But just how important are those “angel customers”? Ask authors GEOFFREY COLVIN and LARRY SELDEN.
After studying scores of companies, they found that 20 percent of a business’ customers account for 150 percent of its profits. The bottom 20 percent of customers — dubbed “demons” by Colvin and Selden — can eat up profits completely. In the duo’s new book, Angel Customers & Demon Customers (Portfolio), they offer advice for maximizing high-profit customers to “turbo-charge your stock.”
Colvin, a Fortune senior editor-at-large and co-anchor of PBS’ Wall Street Week with Fortune, says investors can find smart companies like those profiled in the book (such as Royal Bank of Canada, Fidelity, and Best Buy) by studying company news and annual reports, and even using their own customer experiences as a guide.
But, he cautions, beware of companies taking radical action to exorcise their demons — for instance, the recent wave of companies saying they will drop unprofitable customers. Such strategies may or may not be worthwhile. Colvin and Selden suggest trying to change those “demons” into “angels” before giving them up. “It’s a two-step process — understanding customer profitability in your company and then doing something about it,” Colvin says. “The second one is tougher.”